Bank of Japan stuns markets with yield control policy change
Dec 20, 2022
Tokyo (Japan), December 20 : The Bank of Japan (BOJ) made a surprise decision to allow the 10-year bond yield to move 50 basis points either side of its 0 per cent target, wider than the previous 25 basis point band, Wall Street Journal (WSJ) said in an article. This pushed the yen higher and ended a long period in which it was the only major central bank not to increase rates.
The BOJ said the yield on the 10-year Japanese government bond could rise as high as 50 bps from a previous cap of 25 bps. The central bank has set a target range around zero for the benchmark government bond yield since 2016 and used that as a tool to keep overall market interest rates low, according to the WSJ article.
The 10-year yield, which had been stuck around 0.25 per cent for months because of the central bank cap, quickly moved up to 0.40 per cent in afternoon trading, according to WSJ.
The yen rose in tandem. In Tuesday afternoon trading in Tokyo, one dollar bought between 133 and 134 yen, compared with more than 137 yen before the BOJ's decision, the WSJ article said. For much of this year, the yen had fallen against the dollar because of the widening interest-rate gap between Japan and the US.
The Nikkei Stock Average, which had been slightly higher in the morning, was down more than 2 per cent as investors digested the possibility that companies would have to pay higher interest on their debt, according to the WSJ article. Also, the weak yen has pushed up profits for many exporters, so a stronger yen could be negative for stocks.
BOJ Governor Haruhiko Kuroda, who is nearing the end of 10 years in office, is known for making moves that surprise the market, although he had made fewer of them in recent years.
The Bank of Japan's statement on its decision on Tuesday didn't mention inflation as a reason to let the yield on government bonds rise as high as 0.5 per cent, According to WSJ. Instead, it cited the deteriorating functioning of the government bond market and discrepancies between the 10-year government bond yield and the yield on bonds with other maturities.
According to WSJ, the bank laid out a plan for the first quarter of 2023 that calls for purchasing around Y=9 trillion in Japanese government bonds each month, equivalent to $68 billion, up from Y=7.3 trillion a month previously. The move gives the bank extra firepower to tamp down the bond yield if market pressure is pushing it higher.
The bank said Tuesday's moves would "facilitate the transmission of monetary-easing effects," suggesting it didn't want the decision to be interpreted as monetary tightening.
